DISCUSSIONseptember 6, 2008 EPW Economic & Political Weekly70Financial Sector ReformsGurbachan SinghThe draft Raghuram Rajan Committee report is neither fiscalist nor does it recommend that the Reserve Bank of India focus only on inflation targeting ignoring macroeconomic variables, as observed by Lekha Chakraborty (June 21, 2008). This comment criticises Chakraborty’s views on solution multiplicity, priority sector loan certificates and asymmetric information and related problems in the context of capital account convertibility.I appreciate the painstaking research assistance provided by Amartya Saha.Gurbachan Singh (gbsingh@mail.jnu.ac.in) is at the Jawaharlal Nehru University, New Delhi.This is a critical review of ‘Analysing the Raghuram Rajan Committee Report on Financial Sector Re-forms’ by Lekha Chakraborty (June 21, 2008). Hereafter, we will refer to the said report asCFSR. Chakraborty has com-mented on the macroeconomic framework used in the report and on some other as-pects. We will briefly add a little to the recommendations inCFSR. Inflation TargetingLet us begin with the following quotation from Chakraborty (2008): …theCFSR states: The RBI [Reserve Bank of India] should formally have a single objec-tive, to stay close to a low inflation number, or within a range, in the medium term, and move steadily to a single instrument, the short-term interest rate … [Proposal 1, page (5), Chapter 1,CFSR].This implies that the CFSR recommendation broadly conforms to the “fiscalist literature” that price level inde-terminacy problems can be solved by having the central bank peg the nominal interest rate… (p 11).We have two observations. First, Chakraborty is concerned thatCFSR re-commends thatRBI should focus on a single objective, viz, inflation targeting, which may be inappropriate in India. This is being harsh on CFSR because in chapter 2 (which discusses the macroeconomic frame-work), CFSR says, “Focusing on low and stable inflation does not mean that short-term fluctuations in output and employ-ment growth will be ignored in monetary policy formulation” (CFSR, p 12, chapter 2).So CFSR is not recommending thatRBI should completely ignore other macro-economic variables.Fiscalist LiteratureSecond, and more important, immediately after quoting Proposal 1 from CFSR, Chakraborty writes, Thisimplies that theCFSR recommendation broadly conforms to the “fiscalist litera-ture”… (emphasis ours).It is not clear how this said implication follows from Proposal 1 above. Let us re-construct the chain of arguments in Chakraborty: (1) “Fiscalist literature” views the use of interest rate instrument favourably, (2) CFSR views the use of interest rate instrument favourably. There-fore, (3)CFSR conforms to the “fiscalist literature”. Price Level IndeterminacyThere is a long discussion on “indetermi-nacy” in Chakraborty. Let us go over a bit of background on “indeterminacy” before we proceed further. In this context, it is perhaps best to quote from McCallum (2001): In…earlier literature …the form of indeter-minacy…was “price level indeterminacy”… the current literature…is very different. In-stead of a failure to determine any nominal variable (without any implied problematic behaviour for real variables), the recent… literature is concerned with a multiplicity of stable equilibria in terms of real variables. …McCallum (1986) proposed that different terms be used for the two types of aberra-tional behaviour – nominal indeterminacy and solution multiplicity, respectively… [McCallum 2001: 151].It seems that Chakraborty (2008) is referring “solution multiplicity” when she uses the term “indeterminacy”. Accordingly, henceforth, we will use the term “solution multiplicity” instead of “indeterminacy”. First, McCallum believes that the dis-cussion on solution multiplicity is largely “academic” rather than policy oriented. Second, price level solution multiplicity is not in the context of the “fiscalist litera-ture” alone. Even if we keep aside the latter, we still have the theoretical case of multiple solutions for the price level [Blanchard and Fischer 2000]. So even if CFSR was concerned about the issue of so-lution multiplicity, it still does not follow thatCFSR conforms to the “fiscalist litera-ture”. Third, though there is a recommen-dation that the interest rate is used as an instrument in chapter 1 in CFSR, in chapter 2 (which discusses the macroeconomic framework), it is different. There theCFSR says, “TheRBI should be given full opera-tional independence to achieve the infla-tion objective” (p 22, chapter 2, CFSR).